I have been a shareholder of Conduril for over a decade now, but unfortunately, it hasn’t been a real successful investment so far. I bought my initial stake at €22/share and the stock is currently trading marginally higher at €26.20/share. Although there have been some dividends along the way, they haven’t been enough to compensate for the opportunity cost of holding this position. I believe in buying cheap companies without a catalyst, having faith that something will eventually happen to unlock the value that is there. But assuming I’m right about the value being there in there first place (a big if!), there is still no guarantee that something will happen.

With a more than 10 year holding period I think you can make a good case for throwing the proverbial towel in the ring, but I’m not quite ready to do that. Conduril is still cheap, trading at a 62% discount to NCAV, a 0.20x P/B-ratio and a 5.86x P/E-ratio, but there are also some signs of change on the horizon. In 2022 the company bought back, for the first time in its existence, 10% of the outstanding shares. Given the price the stock trades at I think this is quite accretive to intrinsic value (sadly there is no plan to continue the buybacks this year). Secondly, the chairman of the board recently passed away. He was a major shareholder of the company with a 28.60% ownership stake, and a large transition in the ownership of the company could potentially pave the way for some (hopefully positive) change.

The results for 2022 itself look promising, with earning per share at €4.47, the highest it’s been in the past 8 years. The order backlog is at a healthy level as well, slightly higher than the previous year, and it appears that some of the financial assets on the balance sheet (Angolan government bonds) have been converted to cash. According to the footnotes of the financial statements the remaining bonds have maturity dates in 2023, 2024 and 2026. The majority only matures in 2026, so some patience may be required. Fortunately, I’m a patient investor…

Disclosure

Author is long Conduril

I bought my first shares in Conduril in 2012 for €22/share, and now, almost 7 years later we are roughly back to where I started with shares trading at €25. It hasn’t been a total dud though, because in that period the company did payout a total of €9.50/share in dividends. I was also lucky enough to sell a large part of my position in 2014 and 2015 between €65 and €80/share when I saw deteriorating results appearing on the horizon. It has been a while since I wrote about Conduril, and with the publication of the 2019 interim results I thought it was a good idea to publish a quick update, starting with an updated overview of the historical financials below:

When I bought my first shares on Conduril the company was doing pretty well, earning in some years more than €20/share, but the past years the results have been more modest. Last year the company reported €1.69/share in earnings which was actually a small miracle considering that they lost €9.15/share in the first half of the year. The first half of 2019 was also pretty bad with a loss of €4.52/share, but based on the language in the interim report the company is confident that this year will be better than last year. Given that the backlog has increased from €300 million at the end of the year to €600 million now, that might be a fair assumption. In the period between 2009 and 2014 Conduril was on average earning €16.70/share per year while the average backlog was €618 million. So it could be on the edge of turning things around.

While things seem to be turning around for the construction business itself, there is also a balance sheet aspect to the story. Conduril is at the moment a classic net-net with NCAV/share of €28.70 versus the current €25.00 share price. This number is excluding €89.8 million in “other financial assets” that are recorded as non-current assets on the balance sheet. Adding this to the NCAV would result in a value of €78.58/share. So besides the stock currently trading at a 4x P/E-ratio there is also a good amount of asset backing.

Unfortunately, there are some potentially losses hiding in the “other financial assets” that erode to some extent the asset backing that this stock has. Conduril has made a €13.2 million investment in the “Rotas do Algarve Litoral, S.A.” and a €20.3 million investment in “SPER, S.A.”, two toll roads in Portugal. The “Rotas do Algarve Litoral, S.A.” is facing legal troubles because the “Tribunal da Contas” declared the original contract invalid, and “SPER, S.A.” is possible facing the same. “Rotas do Algarve Litoral, S.A.” is seeking the recover the full amount of the investments from “Infrarastruras de Portugal”, the party that seems to responsible for this mess, but of course, what the outcome will be is highly uncertain and could take a long time. Writing down both Conduril’s investments to zero would leave us with an adjusted NCAV of €59.80/share.

Conduril has one of the rare companies where I have always been enthusiastic about its valuation. Sure, things haven’t gone great the past few years, but at the current price it is just really cheap. Even without factoring in that things look to be turning around it is trading at a 4x P/E-ratio, 0.22x book and a sizable discount to (adjusted) NCAV. But who knows, after seven years I could also just be wrong about this…

Disclosure

Author is long Conduril

Last week Conduril released their annual report for 2017 (Portuguese version only, the English translation follows later). The company is still struggling a bit, but I think there are good reasons to be optimistic. Compared to 2016 revenue was basically unchanged, while EBITDA increased from €29.1 million to €34.5 million and net income increased with 65% from €4.2 million to €7.0 million. Thanks to the higher profitability Conduril has announced to increase its dividend from €0.50/share to €1.50/share, a payout ratio of 39%.

This is of course all pretty decent, but I think the most important announcement in the annual report is that the Angolan bonds, worth €83 million, will finally be turned into cash. Last year I was already waiting for that, and it’s not yet reflected in the financials, but supposedly they were settled on March 21, 2018. Given that the company has currently a market cap of €77.4 million that’s a pretty big event. That means that they can repay the fast majority of their outstanding debt (€116.7 million in total) and the reduced interest expense should have a meaningful impact on their profitability going forward. Even after the settlement of the €83 million in bonds Conduril will continue to have a large exposure to Angola. The non-current “other financial assets” line item hides €55.5 million in debt securities that were previously classified as “assets held for trading”.

Given that the removal of Conduril’s debt could almost double its profitability I think the stock remains extraordinarily cheap. Right now it’s trading at just a 11x P/E ratio, and if we include the “other financial assets” in the NCAV figure it’s trading at a 50% discount to that number as well.

Disclosure

Long Conduril

One of the annual reports I anticipated most was the Conduril one for 2016, and that it finally arrived yesterday. The results are a bit of a mixed story, but offer some basis to be cautiously optimistic. Last year the company saw revenues drop with more than 25%, but remained profitable with €29.1M in EBITDA (down 18.0%) and €4.2M in net income (down 31.1%). Next year is probably going to be better though since the backlog is up to €385 million from €340 million last year. As long as Conduril remains profitable I’m happy, since at this point in time the most important part of the investment thesis is the large discount of 57% to net current asset value (I’m including non-current financial assets in this number as well).

On the balance side of the equation it’s nice to see that a net debt position of €24.6 million was turned in a net cash position of €36.9 million. This number nets the debt at Conduril with assets held for trading (Angolan government bonds) and other financial assets (guaranteed by the Portuguese state), so it’s not yet true cash. This is a bit disappointing since in the latest interim report the €83 million receivable with a guarantee of the Portuguese state was already on the balance sheet, and I expected that it would have been settled for cash by now. Instead the promise that it will be settled soon is the same language as six months ago. Note 18.4:

As of December 31, 2016, this caption falls under the “Convention on the Exportation of Equipment and Services Portuguese Origin, for the Republic of Angola “that benefits from the Portuguese State Guarantee. It will be settled by a Financial institution in the national territory in the short term

This was translated by Google, so it might miss some meaning. While we apparently have to wait a bit longer to get cold hard cash, I’m happy that Conduril has shifted some of its credit exposure from Angola to Portugal during the year. Given the large discount between the current market cap, and its net current asset value I think Conduril remains a very attractive idea. Especially considering that it remains profitable in this challenging environment.

Portugal | Subconcessão do Baixo Alentejo

Disclosure

Author is long Conduril

Conduril released their annual report for 2015 yesterday. As usual the report is initially only available in Portuguese, but luckily Google Translate is pretty awesome. Unfortunately Conduril’s results for 2015 are not equally great. While revenue only dropped 6% from €208 million to €196 million net income dropped dramatically from €29.5 million to €6.2 million. The company doesn’t provide a real explanation for this. They spend a lot more this year on “External supplies and services”, but no idea why and whether or not is going to be an onetime issue or a permanent change. In addition the positive effect of currency movements was a lot smaller this year, although that was partly offset by a big reversal in the provision for doubtful accounts. If Conduril didn’t have that reversal reported earnings would have been close to zero.

Besides the poor – and unexplained – earnings I found the following noteworthy:

• Conduril finally started to do some business again in Portugal. In 2015 23% of revenue originated from their homecountry compared to 7% in 2013 and 2014.
• They loaned €20 million to two Portugese companies that they also own a minority stake in, bringing the total balance to €33.8 million. €20.3 million is outstanding to “SPER – Portuguese Society for Construction and Road Exploration, SA” while “Algarve coast routes, SA” has €13.5 million outstanding.
• A huge part of their balance sheet continues to consist of Angolan government bonds, now worth €101.8 million. Unfortunately the credit rating of the country was recently downgraded from B+ to B because of the lower oil price, its main export product.
• In the second half of 2015 the company finally managed to turn some receivables into cash, lowering the “cash conversion cycle” metric from 283 to 223 days.
• Despite the difficult conditions the backlog is holding up reasonable well, dropping from €450 million at the start of the year to €340 at the end of 2015.
• They announced a dividend of €0.50/share, just 25% of the €2/share that it paid last year.

While the 2015 results were not very good I think that the company continues to represent a great deal, although an increasingly risky one because of the large credit exposure to Angola. With the stock at €42 Conduril is trading at 66% of NCAV and that is ignoring the €33.8 million in loans to Portugese companies that are classified as non-current assets. If we would include those in the valuation NCAV/share would jump from €64 to €83/share.

Disclosure

Author is long Conduril